Supplier risk scoring explained: a car buying experience

September 5, 2018

By Rich Hoffecker, Product Director at The Red Flag Group

Not long ago, being on the verge of empty nester syndrome, or just cashing in on the mid-life-crisis excuse, I went looking for a fun driver’s car. One that allowed me to taste the thrill of my speed demon youth, but offered some level of safety and minimal maintenance hassle – I just want to drive!

The host of options in the used car market is so expansive that it was hard to know where to begin, so I stared where most would: I asked my lawyer Chris (a.k.a. “Counselor). The fact that Counselor is a lawyer has absolutely no bearing on this story, but the fact that we’ve been friends for decades and he knows more about cars than nearly anyone else I know, made him a good place to start. Almost immediately, Counselor had a recommendation; an early 2000s Porsche 911. On the low model end, he figured it would be well within the price range I wanted to spend on a “fun” car, and it’s just a darn sexy car!

Next, I consulted Kelley Blue Book (KBB) website to narrow down the price I should expect to pay for my new toy. KBB provides price estimates for nearly any car, and becomes a valuable tool when anchoring a price during negotiations. By simply entering the car’s year, make, model and my zip code, the KBB algorithm returned an estimated price range. Adding more details about the car, such as the interior package or type of wheels, narrowed the price range even further to reflect this new information. Now I was in business! When I walked into a dealership, I knew exactly what I should be willing to pay for that beauty they had sitting on their lot.

Somewhere between test drives and price evaluations, it occurred to me that this experience is not so different from how Supplier Integrity® scores the integrity risk of potential suppliers. Much like the KBB algorithm, The Red Flag Group’s Risk Analyser algorithm uses business intelligence to calculate scores. Like a car’s year, make and model, a generalized supplier risk score can be calculated from profile attributes like geographic location, industry and company size. Adding more details will improve the risk score accuracy, similar to how the price of my future Porsche was refined when I added premium wheels and a sunroof.

But what is behind these algorithms? How do I know how much a multi disc changer vs a cassette option would change the car value (Cassette? Really Porsche! In 2003?). How do we know how much risk is introduced by differences in a supplier’s annual revenue numbers. The answer is actually quite simple: human intelligence and data. The Red Flag Group® has conducted due diligence on many hundreds of thousands of organizations. Our researchers have gathered assessed and summarized millions of media articles about compliance and integrity issues. 

Now, when I arrived at the dealership and laid eyes on a dark grey 2003 Porsche 911 Carrera, I knew full well that the KBB algorithm was not considering that specific car. It didn’t know about the upgraded stereo (that’s right, no cassette here), or the fact that there was a noticeable door ding on the rear passenger-side quarter panel. To learn this, I had to dig deeper (in this case actually drive out to see the car). Had I moved forward with this particular car, the next due diligence step would have been to order a CARFAX report to ensure there was nothing in the history that I should be concerned about.

Assessing the integrity of a supplier is no different. The Risk Analyser built into the Supplier Integrity® platform gives clients a well-considered risk score based on over a decade of research and business intelligence. This score helps organizations make better decisions about suppliers being considered, and points the way to the level of due diligence that should be applied.

High risk does not mean that you shouldn’t kick the tires (Pun intended). Suppliers in some industries, geographic locations or who provide certain commodities just have inherent risk. Knowing this up front allows you to plan your due diligence strategy accordingly and get deeper insight into the integrity of that specific supplier before signing up with a dodgy company or walking away from what might have been a great deal.

Ultimately, I didn’t buy the Porsche I went to look at, but don’t fret. A few days later I came across a deal that I couldn’t pass up on a Nissan 350Z. It ticked all the boxes and has been a fun car to drive … but I’m still on the hunt for my early 2000’s 911.

 

Make better decisions about who you do business with. Supplier Integrity® is an innovative supply chain ethics, integrity and compliance risk management solution that streamlines your supplier onboarding process and continually monitors for new risks. Learn More

Also recommended: The complete guide to the 23 risk areas 

Previous Article
The Red Flag Group® launches seventh generation due diligence reports
The Red Flag Group® launches seventh generation due diligence reports

After months of intense consultation, market research and client engagements, The Red Flag Group® is launch...

Next Article
Understanding Peer Benchmarking and Business Risk Ratio
Understanding Peer Benchmarking and Business Risk Ratio

When conducting due diligence background checks on your business partners, do you go a step further to chec...

Do your suppliers meet the expectations of your integrity & compliance programme?

Tell me more